84382
Operational Note
Implementing a
Framework for Managing
Fiscal Commitments
from Public Private
Partnerships
Operational Note
Implementing a
Framework for Managing
Fiscal Commitments
from Public Private
Partnerships
The Financial and Private Sector Development (FPD) Network—
Investment Climate Global Practice Private Participation in
Infrastructure and Social Sector Service Line
and The World Bank Institute (WBI).
Table of Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. What are PPP Fiscal Commitments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Why Does Managing Fiscal Commitments from PPPs Matter? . . . . . . . . . . 7
4. Components of a PPP Fiscal Commitment Management Framework . . . 11
4.1 Roles and Responsibilities for Managing Fiscal Commitments
from PPPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Managing Fiscal Commitments—PPP Development Stage. . . . . . . . 17
4.2.1 Identifying and Evaluating Fiscal Commitments to PPPs . . . 17
4.2.2 Assessing Affordability of PPP Fiscal Commitments
as an Input to Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Managing Fiscal Commitments—Project Implementation Stage . . . . 24
4.3.1 Monitoring PPP Fiscal Commitments . . . . . . . . . . . . . . . . . . 24
4.3.2 Reporting and Disclosing PPP Fiscal Commitments. . . . . . . . 24
4.3.3 Budgeting for PPP Fiscal Commitments . . . . . . . . . . . . . . . . 28
5. Role of Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6. Key Messages for Task Team Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Boxes
Box 1: Country Examples of Limits on Fiscal Commitments to PPPs . . . 21
Box 2: Key Questions Addressed in This Note . . . . . . . . . . . . . . . . . . . 34
Box 3: A Sample of Key Readings on This Topic . . . . . . . . . . . . . . . . . 35
Tables
Table 1. Related Roles and Responsibilities of Various Government
Entities for Managing Fiscal Commitments from PPPs . . . . . . . 14
III
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
Table 2: Key Analysis on Fiscal Commitments in Due Diligence of PPP
Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 3: Examples of Key Indicators and Ratios on Affordability
Assessment and Risk Exposure from PPPs . . . . . . . . . . . . . . . . 22
Table 4: Summary of Main Requirements for the Recognition and
Disclosure of Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . 25
Table 5: Example of Reporting Format for Direct Commitments . . . . . . 27
Table 6: Example of Reporting Format for Contingent Commitments . . . 29
IV
Acknowledgments
T
his note is an initiative developed Mousley (Lead PSD Specialist, FPD,
by both the Financial and Private Middle East and North Africa Region–
Sector Development (FPD) Net- MNSF1), Helen Martin (Extended Term
work—Investment Climate Global Prac- Consultant, Sustainable Development
tice Private Participation in Infrastructure Department, Latin America–LCSSD) and
and Social Sector (PPI&SS) Service Line— Katharina Gassner (Senior Economist,
and the World Bank Institute (WBI). It Investment Climate Infrastructure and
presents practical guidance on how to Social Sector Department–CICIS). The
implement a framework for managing note was developed under the guid-
ﬁscal commitments from Public-Private ance of Cecile Fruman (Manager, CICIS),
Partnerships (PPPs). It draws on speciﬁc Clive Harris (Manager, PPP Practice–
regional operational experience and on WBI) and Vyjayanti Desai (Senior Pri-
WBI’s wider thematic engagement with vate Sector Development Specialist and
different partners worldwide. The report Acting Manager, CICIS).
provides relevant information and mate-
rial to help Task Team Leaders/Project The team thanks peer reviewers Sudar-
Leaders/Transaction Leaders in the World shan Gooptu (Sector Manager, Economic
Bank Group tackle this topic when work- Policy and Debt Department–PRMED)
ing on PPP projects and transactions. and Daniel Alberto Benitez (Senior Econ-
omist, Sustainable Development Depart-
Drafting of the note was led by Riham ment, Latin America–LCSSD) for their
Shendy (author, Senior Economist, FPD, valuable input. Furthermore, the team
Africa Region–AFTFP) with contribu- is grateful for additional feedback pro-
tions from: Rui Monteiro (Senior PPP vided by other World Bank colleagues
Specialist, PPP Practice–WBI), Peter during the review process.
V
1. Introduction
T
his note, “Implementing a Case of Ghana.1 In outlining the concepts
Framework for Managing Fiscal and providing more detailed references,
Commitments from Public Pri- the note also draws on the PPP Reference
vate Partnerships,” provides guidance Guide (World Bank Institute and Public-
on managing ﬁscal risks from Public- Private Infrastructure Advisory Facility)2.
Private Partnerships (PPPs) during There is already a relatively well-devel-
approval and implementation. The oped body of literature describing PPP
note provides practical advice on how project identiﬁcation and approval and
to: consistently identify and assess ﬁscal institutional structures within government
commitments arising from PPPs during such as specialized PPP agencies. This
project preparation and implementation; note expands on this literature by outlin-
incorporate these into the project approv- ing an operational framework that will in-
al process, including budgeting for these tegrate PPPs in the wider assessment and
appropriately; and strengthen the mon- management of ﬁscal commitments.
itoring and reporting of ﬁscal commit-
ments over the lifetime of the project. The It is critical to manage PPP ﬁscal
note explains the ﬁscal commitments that commitments if governments are
can arise from PPP projects; why govern- to make good choices about which
ments may ﬁnd it difﬁcult to assess and projects to do as PPPs. Although
manage these ﬁscal commitments and in- there is no universal deﬁnition of a PPP,
corporate them into project selection; and it is deﬁned here as a long-term con-
the key components of an institutional tract between a private party and a gov-
framework to manage ﬁscal commitments ernment agency for providing a public
at both the development and implemen- asset or service, in which the private
tation stages of a project, including the party bears signiﬁcant risk and man-
roles, responsibilities, and processes for agement responsibility. Governments
managing PPP ﬁscal commitments. Final- should undertake PPPs where this route
ly, the note summarizes the key messages offers “value-for-money,” for example,
for Task Team Leaders when tackling this through efﬁciency gains and better proj-
agenda, and it provides a subset of main ect governance achieved by bundling
readings on the topic. The framework the ﬁnancing, design, construction,
is largely based on the World Bank Study operation, and maintenance of infra-
(January 2013): An Operational Frame- structure (a key cost-saving in PPPs)
work for Managing Fiscal Commitments and by following fair, competitive, and
from Public-Private Partnerships: The transparent procurement processes.
1 http://elibrary.worldbank.org/content/book/9780821398685.
2 http://wbi.worldbank.org/wbi/document/public-private-partnerships-reference-guide-version-10.
1
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
Improper assessment of ﬁscal commit- and structuring work incorporates the
ments can bias project selection and analysis needed to assess the project ﬁs-
project prioritization and can produce cal commitments, and that on the basis
ﬁscally and operationally unsustainable of this analysis, input from the Minis-
PPPs that lead to contract renegotia- try of Finance (or equivalent) is sought
tion—to settle disputes, resolve unfore- on the ﬁscal affordability of the project.
seen problems, or compensate the Additionally, it is important to advise
concessionaire for changes in project on structures that need to be put in place
speciﬁcations—jeopardizing expected to monitor the project’s ﬁscal obligations
beneﬁts from the PPPs. over the duration of the contract. While
this note outlines a general and generic
The primary audiences for this paper framework for managing ﬁscal commit-
are Task Team Leaders/Project Lead- ments from PPPs, each government will
ers/Transaction Leaders in the World need to adapt the concepts in this note
Bank Group working on PPP projects to its own systems and institutional struc-
and transactions. Team Leaders need ture in developing its own PPP ﬁscal
to ensure that the project due diligence commitment framework.
2
2. What are PPP Fiscal Commitments?
G
overnments’ contributions include guarantees on particular risk
to the “partnership” of PPPs variables such as exchange rate, inﬂa-
always create different types tion, prices, and trafﬁc, force majeure,
of ﬁscal commitments. PPP con- termination payments, and credit guar-
tracts have ﬁnancial implications and antees, among others.
always pose ﬁscal risks for governments
that need to be monitored and man- The nature and extent of ﬁscal com-
aged effectively.3 In the case of direct mitments that governments bear
liabilities, the need for payment com- depend on the actual PPP proj-
mitments is known, even though there ects they are supporting, as well
may be some uncertainty about the as broader market conditions.
exact value of the payments. Examples In the 2008 global ﬁnancial crisis, gov-
of direct liabilities include upfront “via- ernments found that new forms of sup-
bility gap” payments, in which the gov- port may be needed—under which the
ernment makes a capital contribution government bears more risk—to enable
to ensure a project that is economically PPP deals to close. A recent note on the
desirable but not commercially via- European Union’s PPP market out-
ble can proceed; availability payments lines two main avenues being explored
in which a regular payment over the life by several countries after the crisis: sov-
of the project is conditional on the avail- ereign guarantees applied to project
ability of the service or asset; and out- debt or project bonds, and co-lending
put-based payments or payments made by the government. Examples of recent
per unit of service. For contingent liabili- developments include: sharing interest
ties, payment depends on some uncer- rate risk in the Republic of Korea; loan
tain future event outside the control guarantee facilities in France and Por-
of the government—so the occurrence, tugal; facilities for direct loans to PPPs
value, and timing of a payment may in France and the United Kingdom; and
all be unknown. Contingent liabilities re-ﬁnancing risk in Australia.4 Providing
3 For instance, Chile’s ﬁnancial obligations to concessionaires in future years have an estimated present value
of $3.4 billion. Most of the future payment obligations relate to subsidies and agreements to purchase services
in concessions with no user fees. The estimated present value of revenue guarantees is lower, at $0.3 billion;
see World Bank (2007), “Improving the Management of Concessions: Better Reporting and a New Process for
Decision When to Use a Concession.”
4 Philippe Burger, Justin Tyson, Izabela Karpowicz, and Maria Delgado Coelho (2009), “The Effect of the Finan-
cial Crisis on PPPs,” IMF Working Paper, WP/09/144; European PPP Expertise Centre–EPEC (2011), “Risk Dis-
tribution and Balance Sheet Treatment: Practical Guide”; EPEC (2011), “State Guarantees in PPPs: A Guide
to Better Evaluation, Design, Implementation and Management”; and Richard Foster (2010), “Preserving the
Integrity of the PPP Model in Victoria, Australia, during the Global Financial Crisis,” World Bank Institute PPP
Solutions Note.
3
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
government guarantees as PPP sup- always embed implicit ﬁscal commit-
port instruments is not a new phenom- ments; even when government decides
enon and has been used since the 1980s not to rescue the project company, pub-
in Latin America and East Asia. lic authorities are expected to rescue
the project. The extent of implicit risks
In addition to the explicit ﬁscal com- embedded in a PPP structure, the incen-
mitments that governments bear tives they generate on the operational
under PPPs and that are deﬁned behavior of the PPP project, and the
in contracts, these projects also give government’s ability to manage these
rise to implicit liabilities. Non-con- risks, are criteria that should be taken
tractual obligations that arise from moral into account when deciding to develop
obligations or public expectations are a project as a PPP and design its con-
considered implicit liabilities. For exam- tractual arrangements accordingly.
ple, governments may take on a pay- As a long term project, a PPP will be
ment obligation despite the absence (positively and negatively) impacted
of a legal commitment to do so when by exogenous change—technological,
a project is considered too politically demographic, and commercial— but
and socially sensitive to fail (and lead also by government action or inaction,
to service interruptions). A “Comfort Let- for example, by changes in public pol-
ter” from a minister or other high-level icy and poor execution of government
public ofﬁcial to support a PPP project obligations. The government needs
proposal is often seen by some creditors to manage the risks that it imposes
and investors as equivalent to a sover- on PPP projects.
eign or sub-sovereign guarantee (even
if it is in reality an implicit contingent The “upstream” due diligence on
liability of the central government). PPP selection and design are some
Another form of implicit liability arises of the most important determi-
from the long duration of PPP contracts nants of a PPP’s ﬁscal implications.
(20 to 30 years or more): over this period If the underlying project does not make
unexpected issues almost always arise sense in terms of national policy, socio-
that can lead to contract adjustments economic cost-beneﬁt analysis, or the
or even renegotiations, which can create improved public service delivery it aims
additional ﬁscal costs. Contract termina- to achieve on the basis of minimum
tion (normal or early termination) usu- acceptable service standards, or if the
ally creates implicit liabilities—besides PPP is not structured in a way that will
compensating the project company (or achieve value-for-money, then a PPP
lenders) according to contractual rules, cannot be ﬁscally responsible even if its
public authorities will need to safe- cost is well understood and managed.
guard the continuous provision of pub- The primary consideration for embark-
lic service, or to decommission facilities ing on a PPP should be improved pub-
(that is, terminating public service and lic service delivery rather than ﬁnancial
using the facilities for other purposes, cost minimization. It has been suggested
or demolishing them). Governments that the post-Asian crisis realization of
should recognize that PPP contracts PPP-related contingent liabilities largely
4
2. What are PPP Fiscal Commitments?
resulted from inadequate project design These decisions—choosing a particu-
and poor investment decisions.5 lar project, deciding to do that project
as a PPP, and deciding how that PPP
Lack of proper economic analysis of PPP is structured (including allocating risks
projects may create ﬁscal shocks. PPP and responsibilities and deﬁning pay-
projects should be subjected to a sound ment mechanisms)—are also central
evaluation of costs and beneﬁts incurred elements of the PPP development pro-
by all agents in the society, including cess. For the purposes of this note, the
risks. Even after considering risk, the ben- structure of a proposed PPP is assumed
eﬁts should outweigh the costs. Without to have been developed following these
such evaluation, the sustainability and upstream analyses. This note focuses pri-
credibility of a PPP program risks being marily on the “downstream” assessment
affected by ﬁscal surprises, particularly and management of the ﬁscal implica-
by ones that should have been identiﬁed tions of a PPP, once these key decisions
ex-ante as relevant project risks. have been made.
5 Hana Polackova Brixi (1998), “Government Contingent Liabilities: A Hidden Risk to Fiscal Stability,” Policy
Research Working Paper, World Bank; Hana Polackova Brixi and Allen Schick (2002), Government at Risk: Con-
tingent Liabilities and Fiscal Risk, World Bank and Oxford University Press, Washington, DC and New York.
5
3. Why Does Managing Fiscal
Commitments from PPPs Matter?
M
anaging ﬁscal commitments the risk of accumulating signiﬁcant ﬁscal
under PPPs poses several exposure in the future.
challenges. Fiscal commit-
ments which are long term—extending PPPs may help identify but also
over the lifetime of the PPP contract— may hide true costs of infrastruc-
often do not start until several years ture projects. Assessing PPP ﬁscal
after contract signing. Payments for commitments is critical for good project
contingent liabilities are by deﬁni- selection and prioritization. Contrary
tion uncertain, and they can arise sud- to traditional procurement—in which
denly and unexpectedly when a trigger a government agency can start imple-
event transpires. By contrast, most gov- menting a project based on an under-
ernment budgets are cash based, with valued budget, creating signiﬁcant
a relatively short planning horizon (for sunk costs before the real cost of the
example, a -three- or four-year Medium project emerges—PPP procurement
Term Expenditure Framework) and fol- requires bidders to do a whole-life
low a process designed to be relatively costing of the project before commit-
inﬂexible to “in-year” changes.6 ting to the project’s implementation.
Thus, governments can use PPP pro-
Because of these challenges, gov- curement to help uncover real proj-
ernments can be tempted to under- ect costs before contract close. But
take PPPs for the “wrong” reasons. PPPs may also be used as a conve-
If ﬁscal commitments are not clearly nient way to hide costs, presenting
acknowledged and managed, PPPs may them as contingent liabilities (explicit
be pursued simply to postpone the bud- or implicit). Such hidden costs can bias
get impact of public investment, and project selection and project prioriti-
to move the associated debt off the gov- zation, and they can also jeopardize
ernment balance sheet in a way that long-term ﬁscal sustainability. PPPs
does not take into account the longer- should instead be undertaken in cases
term implications for public ﬁnances. that can be expected to lead to better
This approach can undermine the pos- value-for-money compared to the pub-
sible advantages of PPPs and increase lic project.
6 For more on medium-term ﬁscal frameworks, see Jim Brumby et al (2013 forthcoming), “Medium-term Bud-
geting in the Public Sector,” World Bank.
7
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
Proper assessment of PPP ﬁscal risks In the absence of a proper assess-
is also relevant to ensure effective ment of traditional (non-PPP) pro-
competitive procurement practices. curement projects, several anti-PPP
When ﬁscal risks are not clearly identi- biases may dominate. Adequate assess-
ﬁed and addressed by the government, ment of and reporting on PPP ﬁscal com-
bidders may expect to obtain rents from mitments help eliminate a few pro-PPP
the government during the construction biases, reducing the incentive for shifting
or operational phases through antici- costs to future generations and mitigating
pated renegotiation after being awarded the potential threat to ﬁscal sustainability.
the contract (with no competitive pres- However, a poor assessment of tradition-
sure by then). Therefore, bidding behav- ally procured projects can create a bias
ior may be inﬂuenced, with some ﬁrms against choosing the PPP route, reducing
betting on their ability to inﬂuence future the effectiveness and efﬁciency of proj-
government decisions—bidders with ects. Indeed, traditional procurement
poor ethical standards will beneﬁt from is a major source of cost overruns. In tra-
formal competitive procedures, not nec- ditional procurement, the absence of con-
essarily the most efﬁcient ﬁrms. In that cerns with long-term maintenance and
case, the utmost competitive and trans- operational costs can result in non-opti-
parent procurement process will not mization of the cost of the project over
solve the issue; formal competitive rules its life and allows for easier strategic mis-
will not translate into effective competi- representation of projects through under-
tion (in the sense of survival of the best), evaluation of costs and over-estimation
but rather into gaming behavior. of revenue. Therefore, a framework for
proper assessment of PPP projects should
Budgeting appropriately for PPP ﬁs- not disregard the assessment of traditional
cal commitments is important for procurement projects. Ideally, the assess-
the reputation of a PPP program. ment of traditional procurement should
Providing a clear budgeting mechanism be part of a public investment manage-
to ensure timely payment of both direct ment framework that establishes a level-
and contingent commitments to PPPs playing ﬁeld for the decision on using
improves the credibility of the govern- PPP or traditional procurement. (As pre-
ment’s commitments in the eyes of its viously noted, this note will only address
private partners. If this is not the case the speciﬁc case of PPPs ﬁscal commit-
and the private party perceives a risk ments and their management.)
that payments will not be made when
due, the cost of this risk will be priced Historic and recent experiences
into the PPP contract accordingly and have demonstrated the importance
the advantages of a well-designed of managing government ﬁscal sup-
risk allocation undermined. System- port to PPPs and avoiding biased
atic budgeting and payment are best decision making between PPP and
done as part of the overall framework public procurement routes. In the
in government for managing all PPPs midst of the 1997 Asian crisis, several
rather than only on a project-by-proj- Asian countries suffered exacerbated
ect basis. impacts due to PPP contingent liabilities
8
3. Why Does Managing Fiscal Commitments from PPPs Matter?
that transformed into immediate obliga- The above examples reﬂect instances
tions. While the banking sector was the of macroeconomic crisis which are
major source of ﬁscal liabilities in Korea, closely correlated to the performances
infrastructure projects added to the ﬁs- of PPP projects. For instance, all PPP
cal stress. In Indonesia, concerns have road projects in countries affected
been raised regarding the role of the by macroeconomic crisis (Greece, Por-
Ministry of Finance, which had the tugal, and Spain recently, and previously
chance to intervene in the develop- Malaysia and Mexico) simultaneously
ment of a concession only when it was suffered demand challenges (and faced
too late to propose major changes with- bankruptcy risk) creating a systemic
out serious disruption to the investment risk. The predictability of these events
program. Such problems may have been and the extent to which their impact
more effectively addressed if the Ministry could be mitigated through a ﬁscal
of Finance had assessed the ﬁscal obli- commitment framework can be signif-
gations of these deals at approval.7 More icantly different from project speciﬁc
recently and under the current ﬁnancial and idiosyncratic risks. A careful exam-
and economic crisis, a number of Euro- ination of these examples shows that
pean countries have faced the reality several projects already suffered from
of the ﬁscal implications of their PPP proj- microeconomic issues—low demand
ects. Portugal and Hungary have placed (including projects for which effec-
a moratorium on new PPPs and are tive demand, after the ramp-up phase,
reviewing existing ones. Portugal’s recent stabilized at 10 percent of expected
crisis has been exacerbated by the fact demand) or high cost (for example,
that the government had to make large cost overruns arising out of ex-ante
payments to PPP companies as a result cost under-evaluation due to strategic
of PPP contracts developed in the years misrepresentation of projects in order
before the crisis without adequate con- to maximize the chances of approval).
sideration of their ﬁscal implications. In some cases, those issues induced
Spain is facing a sequence of PPP toll governments to cancel PPP projects and
road operators going bankrupt.8 even PPP programs.
7 Tim Irwin and Tanya Mokdad (2009), “Managing Contingent Liabilities in PPPs: Practice in Australia, Chile, and
South Africa,” World Bank and PPIAF Publication; Louis Wells and Raﬁq Ahmed (2006), Making Foreign Invest-
ment Safe: Property Rights and National Sovereignty, Oxford: Oxford University Press.
8 http://bankwatch.org/public-private-partnerships/background-on-ppps/build-now-pay-heavily-later; Mariana
Abrantes de Sousa (2011), “Managing PPPs for budget sustainability: The case of PPPs in Portugal, from prob-
lems to solutions,” PPP Lusofonia network; and http://www.claretconsult.com/spaintollroads.html
9
4. Components of a PPP Fiscal Commitment
Management Framework
T
he public ﬁnancial management Effective and efﬁcient PPP implementa-
framework for PPPs is discussed tion requires also institutions and capac-
in the World Bank Institute’s PPP ity for assessing PPP projects, procuring
Reference Guide, particularly in sec- them, and managing PPP contracts dur-
tion 2.4, dealing with ﬁscal exposure, ing their long life. Without institutions
budgeting, and reporting. and effective capacity for assessing proj-
ects, PPP ﬁscal costs (direct and con-
This note sets out three key com- tingent, explicit and implicit) will not
ponents of a Fiscal Commitment be well identiﬁed, and so project selec-
Management Framework, which are tion and prioritization may be jeopar-
described in turn in the sections below: dized. Without proper procurement,
those costs cannot be minimized
a. Deﬁning clear roles and responsibil- through competitive pressure. And with-
ities within government for manag- out adequate contract management,
ing the ﬁscal commitments of PPPs ﬁscal costs tend to rise by force of exog-
throughout the project cycle; enous change (technological, demo-
graphic, and commercial), policy action
b. Building the requirement to assess or inaction, and moral hazard or strate-
and approve ﬁscal commitments into gic behavior by the private partner.
the PPP development and approval
process (PPP development stage); PPP Units have a key role to play
in managing ﬁscal commitments.
c. Ensuring ﬁscal commitments are ade- PPPs require a design and procure-
quately managed during PPP project ment approach that signiﬁcantly differs
implementation—by monitoring ﬁs- from the usual approach for four main
cal commitments at a project and reasons. They require complex ﬁnanc-
portfolio level, reporting on and dis- ing arrangements, a broad identiﬁca-
closing them as part of regular gov- tion and analysis of risks, an output- and
ernment ﬁnancial reporting, and performance-based deﬁnition of project
budgeting for them as needed (PPP requirements, and a long-term assess-
implementation stage). ment of the projects. The natural scarcity
of government staff with the required
knowledge typically invites governments
This Fiscal Commitment Manage- to move scarce “PPP resource people”
ment Framework should be part into central teams, known as PPP Units.
of a broader PPP governance regime. PPP Units are usually given responsibility
11
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
for fostering the PPP agenda—advising At project implementation stage, key
on policy, adapting the legal framework, functions are project monitoring and
preparing a pipeline of projects, structur- information gathering for regular ﬁscal
ing them, procuring them, even manag- commitment tracking over the life of the
ing contracts on behalf of line ministries. project, ﬁscal commitment reporting and
Too much centralization risks weaken- disclosure, budget management and
ing the governance regime for PPPs. timely release of funds called for any ﬁs-
The inevitable centralization of govern- cal commitment.
ment PPP expertise should not imply the
full centralization of PPP-related decision Deﬁning institutional responsibili-
making. International experience shows ties for managing PPP ﬁscal commit-
that some checks and balances are ments can be complicated, since it
needed, particularly when large infra- typically requires input from a range
structure investments are at stake. Good of government entities. The primary
decision processes require an informed motivation of a contracting authority,
debate between several government and any internal advisory function such
agencies. For example, some agencies as a PPP unit (depending on the lat-
will propose projects, others will select ter’s mandate), is to develop a PPP proj-
and prioritize them; some will prepare ect and get the deal done. Ensuring the
projects, others will review them. ﬁscal discipline of a project might not
be their primary objective or mandate.
Thus, other government entities have
4.1 Roles and Responsibilities an important role in managing the ﬁs-
for Managing Fiscal cal exposure and budgetary implications
Commitments from PPPs of PPP projects. Due diligence of ﬁscal
commitments needs to be led by the
A number of key ﬁscal commit- entities with prime responsibility for
ment management functions need safeguarding the public purse.
to be undertaken when developing,
awarding, and implementing a PPP Table 1 shows examples of gov-
project. During project development, ernment institutions that can
these functions include identifying and be involved in undertaking these
estimating the cost of all ﬁscal commit- functions. Although the contract-
ments under a proposed project (which, ing authority and its transaction advi-
if the contracting authority is a state- sors cannot be primarily responsible
owned enterprise (SOE), may include for ﬁscal commitment management,
reviewing overall SOE ﬁnancial health they nonetheless have important roles
and ability to cover the proposed PPP to play, as highlighted in the table. The
commitments). Another key function table also highlights the roles of “ﬁscal
at project development is to consider the commitment oversight entities”; in prac-
affordability of the ﬁscal commitments, tice, these functions may be combined
in light of budget priorities and con- in a single entity or a team (typically
straints as well as from an overall liabil- within the Ministry of Finance), or they
ity and macro management viewpoint. may involve input from several different
12
4. Components of a PPP Fiscal Commitment Management Framework
departments and agencies. Ultimately, management and budgeting are respon-
the PPP decision maker, or approving sibilities of different entities—some
body, is responsible for ensuring that mechanism may be needed to manage
the inputs from these oversight enti- and synchronize the various recommen-
ties are taken into account when decid- dations on the ﬁscal commitment that
ing to approve a PPP. The table is meant are communicated to the PPP approving
to be illustrative of the various func- body (such as the Minister of Finance,
tions and does not prescribe any spe- a PPP approval committee, Parliament,
ciﬁc institutional set-up. The structures and so on). Options could include
can vary considerably from one country designating one entity as the lead ﬁs-
to another, and in practice many coun- cal appraiser responsible for gathering
tries do not perform some of these func- inputs from the others, or establishing
tions. Ultimately one will need to adjust a committee composed of the differ-
the proposed functions to the local envi- ent key entities. The cited World Bank
ronment and capacities. For instance, (2007) report on Chile highlights the
after the recent ﬁnancial crisis and fol- challenge of coordination between the
lowing advice from the IMF, the Euro- concessions department and the Min-
pean Commission, and the European istry of Finance; sometimes the latter’s
Central Bank, the central bank in Por- involvement in reviewing the conces-
tugal has become involved in assess- sion’s bidding documents might be too
ing PPP projects’ ﬁscal health, and the late in the process to constitute an effec-
Ministry of Finance was put in charge tive intervention. The status quo institu-
of leading PPP procurement (instead tional setup is believed to create a bias
of line ministries).9 In Chile, the deci- towards the use of concessions.
sions about guarantees and other ﬁnan-
cial commitments to concessionaires Estimates of the required govern-
are made jointly by the Ministry of Pub- ment support for a PPP project
lic Works and Hacienda (the Ministry are commonly developed during
of Finance).10 the transaction due diligence stage
and should be reviewed at differ-
Recommendations on a project’s ﬁs- ent stages of project preparation.
cal commitments need to be coordi- The actual level of ﬁscal commitment
nated; also, the entities undertaking will often not be known until the ten-
the gatekeeping functions will need der process has been carried out and
to provide feedback at various stages the winning bidder selected—particu-
of project development. Depending larly when a ﬁscal commitment such
on the institutional structure in a par- as a level of subsidy)—is among the
ticular country—for example, if debt bid criteria. Thus a subsequent review
9 Government of Portugal, the European Commission, the European Central Bank, and the International Mon-
etary Fund (2011), “Portugal: Memorandum of Understanding on Speciﬁc Economic Policy Conditionality,”
Section 3.21.
10 World Bank (2007), “Improving the Management of Concessions: Better Reporting and a New Process for Deci-
sion When to Use a Concession.”
13
Implementing a Framework for Managing Fiscal Commitments from Public Private Partnerships
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